The ACCC was directed in October to investigate the pricing on home loans to make them more transparent and an interim report released on Monday found the central bank’s analysis was correct.
“This inquiry came about in part because in the middle of June 2019 the Treasurer and Governor both felt that the banks should pass on the full reduction in overnight cash rates into mortgage interest rates. The bank said, no, you have to look at our entire cost of funds,” Mr Sims said.
“From 2018-2019 the banks’ cost of funds went down by more than mortgage interest rates. It’s not surprising the Treasurer and Governor were upset they didn’t pass along the rate. They were right.”
Mr Sims said the banks were able to make their own decisions about how much of the cuts to pass on to customers and how to balance deposit and mortgage rates to manage revenues. But he didn’t think it was a “good idea” to blame the cost of funds as an issue when the banks sometimes raised rates without an RBA increase, and only reduced rates when the official rate was cut. He also urged the banks to pass on the rate cuts faster.
The second part of the inquiry will look at better ways of presenting the true price of a mortgage, which in its current form Mr Sims said “could be seen as unfair” as it rewarded those who called and pushed a lender and penalised those who accepted the offered price. This is due for report at the end of November.
“Here you have the most important financial transaction that households will enter into and it’s one of the hardest things to work out how to price,” he said.
Australian Banking Association chief executive Anna Bligh said the industry would examine the findings, but noted competition in the industry was strong and this was reflected in the report.
“Customers looking for a better rate on their home loan should first contact their bank to see if any reduction is available and then shop around to ensure they get the best deal possible,” Ms Bligh said.
When analysing standard variable rates offered by the major banks the watchdog found a lack of price transparency especially for new loans making it hard to compare, Mr Frydenberg and Housing Minister Michael Sukkar said in a joint statement.
The gap between the amount paid by new borrowers and existing borrowers remained steady over 2019. Both existing customers and new borrowers were given discounts but the offers available to attract new customers were more generous.
But the difference between the headline advertised rate and the actual rate paid had grown over time, making it an unreliable way to work out how much a mortgage would cost, the report found.
“The report also makes clear that banks do not proactively reduce the standard variable rate when their overall cost of funds come down,” the statement said, adding revenue was a motivator for increasing the delay in some circumstances.
“Instead, banks typically only announce a reduction in the standard variable rate when the Reserve Bank of Australia announces a reduction in the cash rate – notwithstanding that the cash rate only represents a part of their overall funding costs.”
The standard variable rate was not an accurate indication of the price paid by customers with nine in 10 borrowers getting an average 1.28 per cent discount off this price. This is worth about $5000 in the first year of borrowing to an average mortgage holder.
Jennifer Duke is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra.